FHA vs Conventional Loans — Which Should You Choose?

FHA and conventional loans are the two most common mortgage types in the US, and the choice between them genuinely matters — not just for whether you qualify, but for what the loan costs you over its full lifetime. This guide gives you a direct, honest comparison.

Who this guide is for

Anyone who's been told they might qualify for either FHA or conventional financing and wants to understand which actually makes more financial sense.

1. The core difference

A conventional loan is not government-backed; it follows guidelines set by Fannie Mae and Freddie Mac. An FHA loan is insured by the Federal Housing Administration, which allows lenders to offer more flexible qualification terms because the government insures the lender against loss.

This single structural difference cascades into nearly every other distinction between the two products — qualification flexibility, mortgage insurance structure, and total cost.

2. Side-by-side comparison

Factor	FHA	Conventional
Minimum credit score	580 (3.5% down)	620
Minimum down payment	3.5%	3%
Maximum DTI	Up to 57%	45–50%
Mortgage insurance	MIP — often life of loan	PMI — cancellable at 20% equity
Property standards	Strict HUD requirements	Standard appraisal only
Loan limits	Lower county-based limits	Higher conforming limits

Sources: HUD, CFPB, Fannie Mae guidelines.

3. Mortgage insurance — the key trade-off

This is the single most important long-term cost difference. FHA's Mortgage Insurance Premium (MIP) consists of an upfront 1.75% charge plus an annual premium that — if your down payment was below 10% — continues for the entire life of the loan. Conventional PMI, by contrast, can be cancelled once your loan-to-value ratio reaches 80%, typically within 5-11 years depending on your down payment and home appreciation.

FHA's flexibility has a long-term cost

A borrower who qualifies for both FHA and conventional financing should carefully weigh FHA's easier qualification against its potentially much longer mortgage insurance obligation. Many FHA borrowers plan to refinance into conventional financing once their credit and equity improve, specifically to eliminate lifetime MIP.

4. A simple decision guide

Credit score below 620? FHA is likely your only path to financing right now. Conventional lenders typically won't approve below 620.

Credit score 620–679, limited savings? FHA may still offer easier approval and a lower rate than a conventional loan would at this score range — compare both.

Credit score 680+, can put down 5% or more? Conventional is usually the better long-term choice — cancellable PMI and typically lower overall cost.

Can put down 20%? Conventional with no PMI at all is almost always the better choice in this scenario.

5. Worked example — same buyer, two loan types

Worked example

Daniel — credit score 645, $300,000 home

645 Credit score

5% Down payment available

2 options FHA vs Conventional

FHA option: Loan amount $285,000. Rate ≈ 6.5%. Upfront MIP (1.75%) ≈ $4,988, rolled into loan. Annual MIP ≈ $130/month, for the life of the loan since his down payment is below 10%. Monthly P&I ≈ $1,829. Total with MIP ≈ $1,959/month.

Conventional option: Same loan amount. At a 645 score, his rate is higher — approximately 7.1% — and PMI is approximately $195/month. Monthly P&I ≈ $1,917. Total with PMI ≈ $2,112/month.

In Daniel's case, FHA is actually cheaper monthly despite the lifetime MIP, because his credit score pushes his conventional rate up significantly. His plan: take the FHA loan now, then refinance to conventional once his score improves past 700 — eliminating MIP and likely securing a meaningfully lower rate at that point.

Frequently asked questions

Yes, through refinancing — this is a common strategy. Once your credit score and home equity improve, refinancing into a conventional loan eliminates ongoing FHA MIP. The trade-off is new closing costs for the refinance, so the timing and break-even calculation matter — see our refinancing guide.

Not necessarily — closing costs depend more on the lender and loan amount than the loan type itself. FHA loans do allow sellers to contribute more toward closing costs (up to 6% of the purchase price) than some conventional loan programs, which can be helpful for buyers with limited cash reserves.

No — this is a common misconception. FHA loans are available to any qualifying borrower, not just first-time buyers, provided the home meets FHA requirements and falls within local loan limits.

FHA. Properties must meet HUD's Minimum Property Standards, covering structural soundness, safety, and security — beyond a standard market-value appraisal. This can complicate FHA financing for fixer-uppers or homes needing significant repairs, whereas conventional loans only require a standard appraisal confirming value.

Editorial disclaimer: This article is written for general educational purposes and does not constitute financial or mortgage advice. Comparison data sourced from HUD and the CFPB. Worked examples are illustrative. Always consult a licensed mortgage professional before making borrowing decisions. Content researched and edited by Mike Lucas, with the assistance of AI writing tools.

About the author Mike Lucas — Founder, MyHomeRates.com

Mike is a UK-based personal finance researcher who built MyHomeRates.com after studying the US mortgage market and finding that millions of American homeowners navigate the biggest financial decision of their lives without plain-English guidance. Read Mike's full story →